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Upfront Cost Definition: 8 Upfront Costs of Buying a Home

Written by MasterClass

Last updated: Oct 16, 2020 • 2 min read

Purchasing a home requires many different payments to different entities. While most homeowners make years of monthly payments to cover their mortgage, they must first cover a series of initial payments known as upfront costs.

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What Is an Upfront Cost?

An upfront cost is an initial sum of money owed in a purchase or business venture. Perhaps the most common iteration of upfront costs is the package of fees owed by home buyers. These out-of-pocket costs, which include a down payment and various closing costs, occur before a home buyer can take title on a piece of property.

Why Is Understanding Upfront Costs Important?

By fully understanding upfront fees, along with ongoing costs like monthly mortgage payments and property taxes, a new homeowner can confidently select a piece of property appropriate for their financial situation. Since the expenses of home ownership go beyond the listed purchase price, a responsible real estate agent will talk their client through the different amounts they will owe to ensure that the buyer is not caught off-guard by high upfront costs.

8 Types of Upfront Costs

As you prepare to purchase of a new home, be mindful of the following upfront costs:

  1. Initial deposit: In order to submit a formal offer, most sellers require buyers to place a cash deposit in an escrow account. This indicates a serious offer, and the deposit will apply toward the total purchase price. If negotiations break down, the deposit can return to the buyer.
  2. Down payment: Expect to make a cash payment of at least 20 percent of the total purchase price in order to secure financing from a bank or other commercial lender. The greater your down payment, the lower the loan amount, which means less money paid in interest.
  3. Home inspections: During an escrow period following an accepted offer, expect to pay a home inspector to assess the structure you're about to purchase. Do not skimp on home inspections; they can save you thousands if you catch problems and negotiate to cover the costs of fixing them.
  4. Taxes: In some states, high upfront costs can come in the form of government fees and taxes. In the state of New York, for example, home purchases may be subject to a 2.7 percent transfer tax. Other states do not levy transfer taxes but may charge other fees for registering property deeds.
  5. Escrow fees: To safely purchase a home, you must make use of an escrow company, which charges a fee for holding and distributing purchase funds.
  6. Insurance: Most commercial lenders require that borrowers obtain homeowners' insurance and private mortgage insurance before their closing date.
  7. Legal fees: A real estate attorney can help you ensure that the purchase agreement, title documents, and other contracts are handled appropriately.
  8. Realtor commission: While the buyer is responsible for all aforementioned upfront costs, the seller pays a realtor's commission unless otherwise negotiated.
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